Abstract
Our study examines how the liberalization of stock markets affects the contractual usefulness of market information in executive compensation, as reflected in the pay-performance sensitivity. Using a quasi-natural experiment in China, we find that stock market liberalization policy increases the pay-for-market-performance relationship but has no significant impact on pay-for-accounting-performance relationship. Further analyses indicate that the influence of market liberalization on the CEO pay-for-market-performance relationship is restricted to firms with effective governance, a strong legal enforcement environment, operating in unregulated industries, and firms without major shareholders from state agencies. Finally, we find that such effects may be a result of higher price informativeness, shorter price delays and lower price mispricing following stock market liberalization.
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